DROP IN BOND YIELDS HERE AND IN GERMANY WEIGH ON STOCKS -- MAJOR STOCK INDEXES MAY RETEST THEIR 200-DAY AVERAGES -- THE BOND/STOCK RATIO IS RISING AGAIN WHICH SUGGESTS THAT INVESTORS ARE HEDGING THEIR BETS ON A STRONGER ECONOMY
TREASURY YIELDS FOLLOW BUNDS LOWER ... German 10-year bunds were sold below zero at today's auction which is keeping downside pressure on Treasury yields. The daily bars in Chart 1 show the 10-Year Treasury yield falling today to the lowest level since the end of 2017. That's pushing bond prices higher and putting downside pressure on stock prices. Fed fund futures are now betting on the possibility of two rate cuts this year by the Fed. While some may view that as good news, one has to wonder why the Fed needs to cut rates if the U.S. economy remains strong. The recent plunge in bond yields, and rising expectations for more Fed easing, would seem to be an admission that the U.S. economy may be slowing faster than expected.
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Chart 1
MAJOR STOCK INDEXES WEAKEN ... The three major stock indexes are also weakening. The daily bars in Chart 2 show the Dow industrials sitting right on its 50-day moving average (blue line) and not too far above its red 200-day line. Any drop below those two support lines would signal more selling. The purple line shows the 14-day RSI line falling below its midline at 50 which also suggests that momentum is weakening. Chart 3 shows the S&P 500 testing support at 2800 which marked the previous highs reached during November and December. The SPX may also retest support at its 200-day line. The daily MACD lines overlaid on Chart 3 turned negative at the start of the month and continue to weaken. The MACD histogram bars have also fallen below their zero line which reflects that negative turn. Chart 4 shows the Nasdaq Composite Index also starting to weaken. It may also retest its red line. Financials and small stocks remain the weakest parts of the market which may also reflect fears of a weaker U.S. economy. All eleven stock sectors are in the red today with the biggest percentage losers in healthcare (led by biotechs), energy, and technology (led lower by semiconductors). Money moving out of stocks is flowing into bonds.
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Chart 2
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Chart 3
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Chart 4
SHORT-TERM SWING FAVORS BONDS... Chart 5 plots a relative strength ratio of the 20-Year Treasury Bond iShares (TLT) divided by the S&P 500 SPDR (SPY) since last September. The ratio surged during the fourth quarter stock selloff as investors favored safer Treasury bonds over riskier stocks. The falling ratio during the first quarter of this year shows sentiment swinging back to stocks between January and February. Since the start of March, however, the bond/stock ratio has started rising again and has now reached the highest level in six weeks. That suggests that investors may be having second thoughts about the strength of the U.S. economy, and have started to hedge their bullish bets on stocks by rotating some funds into the safety of bonds.
